Seeking Alpha
Recommended for you:
Macro, long only, independent research
Profile| Send Message|
( followers)  

I was a guest on CNBC’s Squawk on the Street Friday morning, see (here), and the subject of dollar strength came up. The other guest in the segment pointed out that we have not had a strong dollar since the mid-1980s when the Plaza Accord started bringing it down. I didn’t disagree with that, but I wanted to point out that the dollar is now about as strong (or weak) as it was just prior to the recent financial crisis. Its decline came earlier and was not a result of the Fed’s easy money policy to deal with the crisis, the recession, and slow recovery.

Friday, the dollar index most commonly used, the DXY, reached a recent high of around 80. This index dates back to March 1973 when the base value was assigned 100. So, by this measure the dollar has lost 20 percent of its value in almost 39 years. To make it easy, if it were 40 years, that would be about one-half percent per year.

I mention this because most people seem to believe the loss has been much greater than that. Numbers that are usually cited are significantly larger because they don’t go all the way back to the beginning of the index, but to periods when the index was much higher. The DXY reached a high of 164.72 in February 1985, which led to the Plaza Accord to bring it back down. Compared to that peak, the dollar has lost about half its value in almost 27 years. The starting point for comparison makes a lot of difference, obviously.

People who really want to emphasize how much the dollar has fallen like to measure it against the price of gold. I sometimes counter that it has done much better against computer chips. I really do think that price indexes, like the CPI, are a better measure of the value of the dollar than currency indexes—not that the CPI measure has been kind to the dollar.

Using the DXY index as a measure of the trade-weighted value of the dollar, as opposed to a trading vehicle, seems strange to me given the unrealistic weights of the component currencies. According to Wikipedia, the DXY is composed of only six currencies with the following weights:

The Euro 58.6%

Japanese Yen 12.6 %

British Pound 11.9%

Canadian Dollar 9.1%

Swiss Franc 4.2%

Swedish Krona 3.6%

These weights bear little relationship to current trading patterns. Where is China? Where is Mexico? My purpose is not to suggest that the dollar is really stronger than the DXY makes it out to be. It is obvious that its recent “strength” has resulted primarily from the Euro’s recent “weakness,” given the excessive weight the Euro has in the index.

My take on the dollar is that it needs to be strong to support our rising standard of living and weak to stimulate a recessionary economy. I continue to feel about the dollar as St. Augustine felt about chastity. Let it be strong, but not just yet.

Happy New Year

Source: Is The Dollar Weak Or Strong?